Question: A large automobile repair shop installs about 1,250 mufflers per year, 18 percent of which are for imported cars. All the imported-car mufflers are purchased from a single local supplier at a cost of $18.50 each. The shop uses a holding cost based on a 25 percent annual interest rate. The setup cost for placing an order is estimated to be $28.

a. Determine the optimal number of imported-car mufflers the shop should purchase each time an order is placed, and the time between placement of orders.

b. If the replenishment lead time is six weeks, what is the reorder point based on the level of on-hand inventory?

c. The current reorder policy is to buy imported-car mufflers only once a year. What are the additional holding and setup costs incurred by this policy?